The past six months have been a windfall for Wolverine Worldwide’s shareholders. The company’s stock price has jumped 140%, hitting $25.79 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in Wolverine Worldwide, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.
Why Do We Think Wolverine Worldwide Will Underperform?
We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons you should be careful with WWW and a stock we'd rather own.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Wolverine Worldwide’s demand was weak over the last five years as its sales fell at a 1.6% annual rate. This wasn’t a great result and signals it’s a low quality business.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Wolverine Worldwide, its EPS declined by 5.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. Previous Growth Initiatives Have Lost Money
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
Wolverine Worldwide’s five-year average ROIC was negative 2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.
Final Judgment
Wolverine Worldwide doesn’t pass our quality test. Following the recent rally, the stock trades at 17.8× forward P/E (or $25.79 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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